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Tuesday, September 15, 2009

One Year Plus One Day

As the anniversary of Lehman Brothers fades into the distance, it is time to consider what purpose Wall Street banks serve. As you know from earlier posts, just three banks now control over 30% of all deposits in the U.S. That is a tremendous amount of power over the economy to be held by just a handful of people.

The financial system's function is to collect the savings in the economy and direct them to productive uses to make the economy grow. The borrowers of the savings pay the owners of the savings for the privilege of using the savings. Banks serve the job of intermediary and get paid a fee for doing the job of collecting savings and parceling them out to worthy borrowers. Simple enough, right? And vital to the growth of the economy, right?

In 1996, the financial firms in the S&P 500 earned $65 Billion for making the financial system function. By 2007, that payment had grown to $232 Billion, that is growth from 19.5% of the total profits of the S&P 500 to 27%.

In 2007, the profits of financial firms accounted for a full 40% of the total profits of all U.S. corporations. They earned those profits without manufacturing a single thing.

It seems to me that it is high time to ask again what is the purpose of the financial system and how should the members be paid.

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